Reviewing a Litigation Appraisal with a False Certification
You are asked by counsel for a property owner to review an appraisal prepared for condemnation litigation. The report values a 62,000-square-foot suburban office building at $12.4 million as of January 1, 2024. It states the interest appraised is 'fee simple,' but the property is 78% leased to three tenants with staggered expirations through 2031, and the income approach uses contract rents rather than market rent. The sales comparison section lists five sales, makes a single 'net adjustment' of -12% without explaining which sale prices were adjusted or why, and reports a range of $11.9 to $12.7 million. The certification says the appraiser 'has no present or prospective interest' in the property, but the workfile shows the appraiser leased office space in the building in 2021. The report also states 'value is subject to the roof being replaced' but does not describe the roof condition, cost, or who will complete the work. Opposing counsel asks you to sign a one-page letter adopting the report's value because 'the numbers are close enough.'
1. Identify the report deficiencies that most seriously undermine its credibility and explain why each matters under appraisal standards.
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The most serious issues are: (1) The interest appraised is mislabeled. A property that is 78% leased with staggered expirations is not a simple fee simple valuation if the income approach uses contract rents. The report must state whether it values the leased fee or fee simple and use consistent rent assumptions. (2) The income approach uses contract rents for a stated fee simple interest. For fee simple, market rent is the usual premise; for leased fee, contract rents and lease terms are relevant. Mixing them misleads the reader. (3) The sales comparison section reports a single -12% net adjustment with no adjustment grid or explanation. The reader cannot tell what was adjusted or whether the adjustment is supported. (4) The certification may be false or incomplete if the appraiser had a leasehold interest in the building. At minimum, the prior relationship must be investigated and disclosed; if the lease is current or the statement is inaccurate, the certification is a serious problem. (5) The 'subject to roof replacement' statement is not a complete hypothetical condition. The report must describe the roof, the cost, who will do the work, and the effect on value, or state clearly that the condition is assumed. Without that, the value is not reproducible.
2. Can you sign the one-page letter adopting the report's $12.4 million value because the numbers are 'close enough'? Explain.
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No. Signing a letter that adopts another appraiser's value is not a substitute for my own analysis. If I am engaged to review the appraisal, I must comply with the appraisal review standards: identify the reviewer's scope, develop my own opinion of the report's completeness and credibility, and, if I provide an opinion of value, support it with my own analysis and workfile. If I am engaged to appraise, I need a full development and reporting process. 'Close enough' is not a supported basis. The existing report has an inconsistent interest, an unexplained adjustment grid, a possible false certification, and an incomplete hypothetical condition, so I cannot concur without corrections or independent verification. A one-page letter that merely adopts the value would also be misleading if it omitted those limitations. I would tell counsel that I can review the report or prepare an independent appraisal, but I will not sign an adoption letter on this record.
3. What corrections would you request from the original appraiser, and what would you do if the appraiser refuses?
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I would request a corrected report that: states the interest appraised correctly and uses rent assumptions consistent with that interest; includes a sales adjustment grid with each adjustment explained; discloses the appraiser's prior leasehold or other relationship and corrects the certification if needed; describes the roof condition, the cost to replace it, who will perform the work, and whether the value is subject to a hypothetical condition; and reconciles the $11.9 million to $12.7 million range to the $12.4 million conclusion. If the appraiser refuses, I would document the request and the refusal, complete my review based on the available record, and state that the report is not credible for the stated intended use. I would not cure the defects by signing the report or adopting its value. If litigation requires an opinion of value, I would develop an independent appraisal with my own workfile and disclosures.